February 10, 2012

Obama’s Worst Year

Shortly after four o’clock on the afternoon of Wednesday, April 13, 2011, U.S. Treasury Secretary Tim Geithner walked down the hallway near his office toward a large conference room facing the building’s interior. He was accompanied by a retinue of counselors and aides. When they arrived in the room—known around Treasury simply as “the large”—four people were seated at a long walnut table on the side near the door. Geithner and his entourage greeted them, then walked around to the far side and took their seats.

The four guests hailed from the credit-rating agency Standard & Poor’s (S&P), an outfit the administration’s economic team, like much of the financial world, held in exceedingly low regard. Long before the financial crisis of 2008, S&P and its fellow rating agencies had been derided on Wall Street as hubs for intellectual mediocrities—the clock-punchers that banks and hedge funds had passed over. Then, during the bubble years, the big banks became expert at duping the agencies into blessing their dodgy mortgage securities. Suffice it to say, Treasury was unimpressed with S&P’s analytical powers.

Geithner spoke to the credit-raters with thinly concealed skepticism. “He did not view these guys as worthy of this kind of meeting,” says one colleague. A few days before, S&P had warned Treasury it intended to downgrade its “outlook” on U.S. bonds, the first step toward withdrawing the triple-A status that essentially stamped them as riskless. But Geithner had no intention of begging them to change their minds. Treasury officials felt that if S&P moved ahead with this decision, the company would only embarrass itself, not the U.S. government. In this vein, Geithner simply informed the visitors that his country’s economic performance had exceeded S&P’s expectations on almost every measure it claimed to care about. As for the one where it lagged—the deficit—Geithner pointed out that the president had proposed cutting it by $4 trillion that very morning.

The de facto spokesperson for S&P, a mustachioed man named David Beers, confessed that the group’s concerns were really about politics, not economics. The administration’s ambitious deficit plan was all well and good, but the prospects for actually enacting one were vanishingly remote. Beers and his colleagues didn’t think Republicans would take the president’s deficit plan seriously. The parties were simply too far apart.

At this, Geithner became somewhat dismissive, according to three sources in the room. He asked how S&P could handicap a political debate in Washington given that its expertise, such as it was, lay in finance. It’s not your “comparative advantage,” the secretary said. Then he gestured toward the Obama officials seated on either side of him—Jack Lew, the White House budget director; Neal Wolin, the deputy Treasury secretary; Bruce Reed, the vice president’s chief of staff—and explained that all of them had been top aides to Bill Clinton during the last stand-off between a Democratic president and a Republican Congress. “We said, ‘This is the way it worked in the nineties,’” recalls one former administration official. “‘After a big election, when you have divided government, you fight a bit, then find a middle ground.’” Another official remembers arguing that “when both sides had firmly committed to a goal and the public was in support of it, it eventually had to happen.”

But it turned out the S&P officials were right. For the better part of the next four months, the administration would be mired in painstaking negotiations with Republicans over a series of dead-end deficit deals, even as the economy teetered on the edge of a second recession. It would prove to be a damaging experience for Team Obama and a window onto the administration's self-sabotaging obsession with deficits. Above all, it would expose Obama’s greatest vulnerability as a leader.

BACK IN THE SUMMER of 2009, David Axelrod, the president’s top political aide, was peppering White House economist Christina Romer with questions in preparation for a talk-show appearance. With unemployment nearing 10 percent, many commentators on the left were second-guessing the size of the original stimulus, and so Axelrod asked if it had been big enough. “Abso-fucking-lutely not,” Romer responded. She said it half-jokingly, but the joke was that she would use the line on television. She was dead serious about the sentiment. Axelrod did not seem amused.

For Romer, the crusade was a lonely one. While she believed the economy needed another boost in order to recover, many in the administration were insisting on cuts. The chief proponent of this view was budget director Peter Orszag. Worried that the deficit was undermining the confidence of businessmen, Orszag lobbied to pare down the budget in August, six months ahead of the usual budget schedule. At his request, the economic team held weeks of meetings on the subject before the White House finally decided the summer was a lousy time to unveil new budget proposals, especially with the health care debate raging.

The debate was not only a question of policy. It was also about governing style—and, in a sense, about the very nature of the Obama presidency. Pitching a deficit-reduction plan would be a concession to critics on the right, who argued that the original stimulus and the health care bill amounted to liberal overreach. It would be premised on the notion that bipartisan compromise on a major issue was still possible. A play for more stimulus, on the other hand, would be a defiant action, and Obama clearly recognized this. When Romer later urged him to double-down, he groused, “The American people don’t think it worked, so I can’t do it.”

Only in the fall did Romer finally gain an ally—White House economic adviser Larry Summers, who had begun to echo her pleas. But Orszag insisted that any additional stimulus be paired with deficit-reduction. The result was stalemate. Even when the two sides worked out a compromise—$100 to $200 billion of stimulus in the short term, with offsetting cuts over ten years—the truce quickly unraveled.

Seated in the Roosevelt Room in early December 2009, the president wondered why both sets of ideas were so timid. Orszag grumbled that it was, in fact, disappointing to offer so little on the deficit front. Summers interjected that the economy was in dire need of more stimulus. Each side then labeled the other’s proposals political nonstarters, and the president lost his patience. “You know what, this is the same meeting we’ve been having,” he said, excusing himself. “Talk to me when you’ve thought this through.” The bickering soon grew so loud that Orszag’s deputy, Rob Nabors, lunged to shut the door.

With no agreement forthcoming, it was Orszag who filled the vacuum throughout the fall. He urged the president to freeze domestic spending in his next budget and favored setting up a commission of Washington elders to recommend trillions in savings over a decade. Summers believed such ideas were gimmicks unworthy of a president. To colleagues he complained that “what’s really important in life is not to believe your own bullshit.” The president sided with Orszag.

BY JANUARY 2011, two months after Democrats suffered a rout in the congressional midterm elections, the West Wing again faced a critical choice between engaging with Republicans and playing partisan hardball. Should they tackle the trillion-dollar deficit, co-opting the anti-government zeal that Republicans had ridden to power? Or should they try to lower the stubbornly high unemployment rate, which had exceeded 9 percent for 20 straight months?

The president’s team quickly concluded that the deficit was the higher priority. Bill Daley, a former Commerce secretary and bank executive who had recently taken over as chief of staff, considered the administration so out of touch on the issue of government spending that large cuts could only bring political benefits. David Plouffe, who had replaced Axelrod as the president’s top political counselor, thought Obama needed to establish himself as a budget-cutter to regain credibility with voters. “Plouffe specifically said, ‘We’re going to need a period of ugliness’—he meant with the left—‘so that people in the center understand that we’re not wasting their tax dollars,” recalls a former administration official who observed the discussions. (The White House says Plouffe believed these efforts would help the administration protect core investments in technology, infrastructure, and education.)

The decision to focus on the deficit in 2011 was defensible at the time. It wasn’t until much later that the economy’s weakness became clear. And the Republicans’ determination to shrink the government was difficult to ignore following the party’s landslide victory. But there was one judgment call that was harder to forgive. It had to do with the debt ceiling, a cap on the total amount of debt the federal government can run up at any given time.

Many incoming Republican members of Congress had campaigned on their refusal to raise the limit, which was rapidly approaching, and senior Treasury Department officials worried that their resistance could prove disastrous. Most economists believed that hitting the debt ceiling could heighten doubts about the government’s creditworthiness and trigger a run on U.S. Treasury bonds, driving interest rates into the stratosphere. But the Tea Party Republicans asserted that not raising the debt ceiling would simply force a profligate Congress to spend less money.

After the midterm elections, Geithner’s chief of staff, Mark Patterson, thought the administration should try to defuse the debt-limit issue once and for all before the incoming Republicans arrived. He drafted a law giving the president the authority to raise the debt ceiling unilaterally and sent it to the White House. To sell it politically, the president could explain that renewing the upper-income Bush tax cuts, as Republicans were then demanding, would cost the government $700 billion over ten years, forcing it to hit the debt ceiling sooner.

The White House was initially interested, but dropped the idea once Republicans made clear they would oppose it. But, of course, the way to win concessions from obstructionist opponents isn’t to sound them out quietly. It’s to cause them public discomfort. As one former Treasury aide who was involved explains: “Imagine the alternative reality where the president comes out in December and says, ‘I understand you want to increase the high-end tax cuts. But that will make the deficit go up. … I am willing to do some of what you want to do, but you have to pay for it by raising the debt ceiling.’” At the very least, it would have put the GOP on the defensive.

But the White House didn’t have an appetite for going to war so soon after the midterms. Instead, it chose to bargain behind the scenes, renewing the Bush tax cuts in order to win more tax benefits for workers. “The feeling [at the White House] was, ‘Let’s go home, lick our wounds, sort it out.’ There wasn’t a lot of fight in folks,” says the former Treasury aide. “We [at Treasury] were a little bit obsessed. They were, ‘Yeah, yeah, yeah, we’ll deal with it later.’ ”

Sensing an advantage, the GOP pounced. Within a few months, Republicans had begun to insist they would only raise the debt ceiling if Democrats agreed to cut trillions from the deficit over a decade—essentially threatening the country with financial ruin unless they got their way.

The proper response to such a threat is to refuse to negotiate under duress. Treasury pleaded with the White House to hold the line and, for a while, it did. But, in mid-April, the White House blinked, acknowledging that deficit reduction could be part of the negotiation over the debt limit. The White House wanted a big deficit deal, too, after all, and believed it could ink one with Republicans. Meanwhile, Daley was confident that wealthy Republican donors on Wall Street wouldn’t let their party seriously threaten default—never mind the mounting evidence to the contrary.

WHEN THE BIPARTISAN talks over the long-term deficit began in early May, the White House was prepared to hammer away at each galling detail of the GOP’s proposals. There were plans to highlight the way Republicans would force retirees to pay $6,000 more per year for their Medicare benefits by 2022, and to point out how this would require the average senior to come up with over $100,000 more in retirement. The White House had even filmed a series of “White Board” videos making these points featuring Austan Goolsbee, the telegenic chairman of the Council of Economic Advisers.

Going on the attack seemed like a win-win strategy. Either the assault would sabotage the discussions, setting the stage for a much smaller deficit deal, in which case the White House could delegate the negotiations to Congress while the president talked about jobs. Or it would put public pressure on Republicans, giving the administration badly needed leverage.

But when the administration’s envoys to the talks—Vice President Joe Biden, Geithner, Lew, Reed, and Gene Sperling, the president’s top economic adviser—trooped back from their first few meetings with Eric Cantor and Jon Kyl, the second-ranking Republicans in the House and Senate, they conveyed a fateful message to their colleagues: Hold your fire. “The view from the negotiators in the room was that publicly attacking the Republicans would blow up the negotiations,” recalls a former White House aide involved. “They thought the negotiations were going well. No one was leaking out details to the press. They thought they could do it.”

Lew, Sperling, and Reed had served as top Clinton aides when the president had struck a budget deal with Republicans in 1997. The effort had led them to believe another deal was possible now. “The experience we had with the Republican Congress in the mid-nineties was that they came in and didn’t want to reach agreement,” says one Clinton veteran who returned under Obama. “But, by mid-’96, they were pleading with us to agree with them on something.”

Unfortunately, this analogy ignored some fundamental differences between the mid-’90s and 2011. Republicans were less extreme during the Clinton years—and as of 1995, the unemployment rate was under 6 percent. In 2011, on the other hand, the Republicans were in the grips of true fiscal fanaticism while the economy was distressingly fragile. Even if it were possible to eventually strike a deal, the country couldn’t afford a prolonged debate over how to apportion the pain.

In June, the negotiators reached a provisional agreement with Republicans on more than $1 trillion in cuts, and the Obama contingent had begun to believe a much larger deal was in sight. Such a deal, they assumed, would involve Democrats agreeing to modest Medicare cuts in exchange for eliminating a few narrow tax breaks, like those benefiting oil companies and corporate jet owners. “Biden and Sperling and Lew were pretty enthusiastic about where this is going,” recalls one White House official familiar with the negotiations.

But Obama was skeptical. When his negotiators briefed him on the possible bargain, he turned to Nancy Ann DeParle, the health care expert who was his deputy chief of staff, and asked how much the proposed Medicare cuts would cost the average senior. DeParle said it would mean an increase of a few hundred dollars each year. The president then asked his negotiators what someone in his income bracket would have to fork over in tax increases as a result of the deal they were working on. “The answer was nothing,” said a White House official at the meeting. “Unless you own a corporate jet or you’re an oil company, you’re not going to have to pay anything more.” Obama frowned. “How can I ask seniors to pay $500 more and I don’t have to pay a nickel? I can’t do that.” The president instructed his negotiators to return to the bargaining table and insist on more sacrifice from the wealthy.

The problem was that Obama’s team had actually presented an optimistic view of what was possible—what it had assumed would be the best-case scenario. The negotiators hadn’t actually broached the idea of tax hikes with Cantor and Kyl in any detail, and the two Republicans certainly hadn’t said they would be open to them. Not even meager hikes, not even in return for a longstanding conservative goal like scaling back Medicare. In fact, Cantor and Kyl had waved off Democratic efforts to pin them down on the tax question.

Eventually, one congressional Democrat participating in the negotiations, worried that the conversation had focused too much on cuts for Medicare recipients of modest means, insisted to the Republicans that they could defer the tax discussion no longer. “Why should we be engaged in a conversation asking them to pay more unless you’re talking about closing corporate tax loopholes and special breaks for corporate jets?” he asked. But whenever he and other Democrats made this point, Cantor and Kyl became visibly flustered, according to two observers. They groused that it would be far more productive to stay focused on the spending cuts that all sides could support, rather than get bogged down talking tax increases, which the Republicans opposed.

“Let me get this right,” Kyl finally said to Lew and Sperling when the discussion flared up again. “You’re saying there are Medicare savings you think would be good policy. But you won’t do them unless we agree to raise taxes?” Lew and Sperling looked back at him stone-faced and simply said, “Yes.” A few days later, on June 23, Cantor and Kyl withdrew from the negotiations. Even the deal the president had deemed insultingly weak was out of reach.

OBAMA WAS BEGINNING to believe the only way to extract real tax increases from the GOP was to raise the stakes. Just as the Biden talks were breaking down, the president made yet another effort to reach out to Republicans, opening a back channel with House Speaker John Boehner. The two men agreed to sniff around the edges of a so-called grand bargain that would shrink the deficit by $4 trillion. Obama said he could entertain serious cuts to Medicare and Social Security; Boehner said he might be able to come up with $800 billion in revenue.

At first glance, Boehner’s stance was encouraging. But there had long been signs that Boehner’s personal views were meaningless because he couldn’t control his party. Back in March, more than 50 conservatives deserted him on a key budget measure that they considered insufficiently tough. In April, the White House believed it had reached a short-term budget deal with Boehner before he abruptly demanded billions more in cuts, apparently under pressure from his rank-and-file.

For most of July, Obama and Boehner went back and forth at frequent intervals. But while the buzz of activity mimicked a high-stakes negotiation, there was never anything to show for it. At one point, over the July Fourth weekend, the president called back his entire economic team from vacation because it looked as if the talks were ripening. By the following weekend, Boehner’s office went silent with no explanation. Sperling began cracking that he “wouldn’t want to date these guys. They leave without having the ‘can we see other people’ conversation.” After a few weeks of this routine, it was blindingly obvious that Boehner wouldn’t be bringing conservatives with him on any deal involving taxes.

Under normal circumstances, the logical response to a negotiation in which one’s counterpart walks away from increasingly attractive offers is simply to give up. But, by late July 2011, this was no longer an option. There were less than two weeks before the government’s mounting pile of IOUs ran smack into the debt ceiling, risking global financial calamity. After three and a half months of largely fruitless negotiation, the White House still had to reach agreement with the Republican House.

Not surprisingly, given that Obama was determined to avoid a debt ceiling catastrophe while many Republicans believed hitting the limit might do some good, the eventual deal skewed heavily toward Republican priorities. It cut $900 billion over a decade from the pot of money Congress doles out each year and instructed a special “supercommittee” of congressmen and senators to find at least $1.2 trillion more in cuts. Were the committee to fail at this task, then the deal called for automatic cuts totaling $1.2 trillion over a decade, with roughly half to come from domestic programs, including Medicare. The deal raised not one cent of taxes.

FOR TWO AND A HALF YEARS, Obama had been hatching proposals with an eye toward winning over the opposition. In most cases, all it had gotten him was more extreme demands from Republicans and not even a pretense of bipartisan support. Now, after the searing experience of the deficit deal, he still wanted reasonable, centrist policies. But he was done trying to fit them to the ever-shifting conservative zeitgeist. When he finally turned back to jobs in August, he told his aides not to “self-edit” proposals to improve their chances of passing the Republican House. “He pushed us to make sure this was not simply a predesigned legislative compromise,” one recalls.

Sperling, who had long been a voice for ambitious policy, took the directive to heart. By the end of the month, his staff had come up with $450 billion worth of proposals to boost the economy, including an expanded version of the payroll tax cut Congress had approved the previous December. Many of the political operatives began to worry that the size of the package would be a liability and urged the wonks to scale it back. But this time, the president was inclined to be bold. The key mistake of the first stimulus—and much of his economic agenda to date—had been to undershoot. Now he was refusing to make it again.

It wasn’t the only valuable lesson the president had learned. He also seemed to recognize that the nonstop commotion over the deficit was a political loser, especially if he was at the center of it. When the so-called supercommittee convened in September, Obama got nowhere near the action. Instead, he left the congressional hagglers to forge ahead on their own and stuck single-mindedly to his message of jobs. It was the strategy he should have adopted back in April.

Obama was finally shedding the caution of his first three years in office. Even before the deficit negotiations collapsed, he'd begun criticizing Republicans for their aversion to “shared sacrifice.” He gave an impassioned speech about economic inequality and vowed to ensure that millionaires paid their fair share in taxes. “It is wrong for Warren Buffett’s secretary to pay a higher tax rate than Warren Buffett,” he famously said.

For voters contemplating whether he deserves a second term, the question is less and less one of policy or even worldview than of basic disposition. Throughout his political career, Obama has displayed an uncanny knack for responding to existential threats. He sharpened his message against Hillary Clinton in late November 2007, just in time to salvage the Iowa caucuses and block her coronation. He condemned his longtime pastor, Jeremiah Wright, just before Wright’s racialist comments could doom his presidential hopes. Once in office, Obama led two last-minute counteroffensives to save health care reform. But, in every case, the adjustments didn’t come until the crisis was already at hand. His initial approach was too passive and too accommodating, and he stuck with it far too long.

Given the booby traps that await the next president—Iranian nukes, global financial turmoil—this habit seems dangerously risky. Sooner or later, Obama may encounter a crisis that can’t be reversed at the eleventh hour. Is Obama’s newfound boldness on the economy yet another last-minute course-correction? Or has he finally learned a deeper lesson? More than just a presidency may hinge on the answer.

Noam Scheiber is a senior editor at The New Republic and Schwartz Fellow at the New America Foundation. He is also the author of the forthcoming book The Escape Artists: How Obama’s Team Fumbled the Recovery, from which this article is adapted. The article appeared in the March 15, 2012 issue of the magazine.